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The European flexible packaging market accounted for just under one-quarter of the world flexible packaging market of ,39 billion in 2004. But growth levels are below those experienced in other regions—a continuing profit squeeze for European flexible packaging converters.

As substantial structural change in the sector is predicted, this article provides some of the background to these predictions and explores the driving forces for change.

Slow Growth Total European flexible packaging consumption was ,10.5 billion in 2004, and approximately ,1,300 million was unconverted flexible packaging, primarily biaxially oriented polypropylene (BOPP), polyvinyl chloride (PVC), and cast polypropylene (CPP) films sold directly to packagers, with the value of converted flexible packaging amounting to ,9,188 million.

Demand in the total European flexible packaging market, comprising Western, Central, and Eastern Europe and including Russia and Turkey, grew in value terms by barely 1% in 2004, having grown by 1.5% in the previous year. Continuing a trend experienced over the last few years, sales value growth lags that of volume due to continuing overcapacity in Western Europe and downward price pressures in an intensely competitive market.

Within the overall market, demand for converted flexible packaging in Western Europe in 2004 was barely growth positive, increasing by only 0.3%, while demand in Central and Eastern Europe increased by 6% and Turkey by nearly 8%.

Decline in Exports to Americas In total, European flexible packaging converters produced about ,9,800 million of converted materials in 2004. Approximately ,690 million (7%) of production was exported outside the region, primarily to the Americas and Africa. This represents a decline of about 2.5% on the previous year, reflecting the difficulties associated with the high value of the euro against the US dollar and other currencies and also the trend toward more import substitution in many traditional export markets.

Imports of converted materials from outside the European region amounted to just over ,80 million, accounting for less than 1% of the European market, but our research has identified increasing interest from brand owners in low-cost sources outside of Europe.

The impact of rapidly increasing raw material costs last year and the difficulties faced in fully recovering these costs from customers has resulted in the decline of profitability for many converters to unsustainable levels and resulting in company closures.

Consolidation As a result of recent structural changes and consolidations, the top ten European converters in 2004 accounted for ,5,158 million, or 60% of total European sales (see Table I). A further ten companies accounted for an additional ,1,194 million, 13% of the total. The remaining 27% of sales is shared among several hundred small- and medium-sized converters serving both local and international markets.

Our study forecasts continued pressures for this competitive market in the future. In spite of the restructuring and rationalization among the major players in recent years, overcapacity continues to be a problem in Western Europe and is expected to remain so over the next few years. Barriers to entry at the bottom end of the market are relatively low, and the market is seeing many new entrants even while others are being forced out of business or acquired.

The Shift to Central Europe The accession of a number of countries in Central Europe to membership of the EU has freed up economies in the region and encouraged more cross-border trade. Brand owners are under extreme price pressures from retailers who are looking for cost reductions both within their organizations and from their suppliers. Many brand owners, therefore, are consolidating more of their production in low-cost Central European countries, especially Poland, and sourcing flexible packaging locally. These packagers, who originally used their Central European plants to supply only within the region, now increasingly are supplying across the whole of Europe.

In addition, brand owners in Western Europe are beginning to source some of their high-specification flexible packaging needs from converters based in Central and Eastern Europe. The long-term effects of these important trends will be to exacerbate overcapacity in Western Europe, which despite rationalization by the leading converters, shows no sign of abating.

Return on Investment One of the key problems facing converters is their inability to make acceptable longer-term returns on their investments in new technologies and innovation. In an intensely competitive and price-sensitive marketplace, new high added-value technical innovations often become commodity products quickly as competitors make similar investments and packagers constantly look for cost reductions. For a technically driven converter, the window of opportunity for generating better-than-average returns on their investments is getting progressively smaller. As converters find it increasingly difficult to recoup their investment costs on new products, end-users ultimately may find that innovation becomes the responsibility of only the very largest converters.

Outlook to 2009 In terms of demand, we forecast the total European converted flexible packaging market will grow by an average of 1.7%/yr in value terms over the next five years to reach about ,10 billion in 2009 (see Table II). As in the past 2-3 yrs, most of the growth will be in Central and Eastern Europe and Turkey.

Table II

European Converted Flexible Packaging Demand 2004 & 2009 millions

Country/Region

2004

2009

Average %/Year Change 2004 to 2009

Western Europe

8,040

8,434

1.0%

Eastern Europe

876

1,221

6.9%

Turkey

272

345

4.9%

Total Europe

9,188

10,000

1.7%

Key Points Summary The following trends are the driving forces behind the predicted structural change for the region:

Year-on-year growth across Europe slowed from 1.5% to barely 1%. Strongest growth was experienced in Central and Eastern Europe and Turkey.

Despite rationalization and consolidation, Western European converters continue to suffer.

Even high added-value technical innovations are proving difficult to exploit profitably.

Converters are having to adapt supply chains and make additional investments to follow the food manufacturers that are relocating manufacturing plants to Eastern Europe to take advantage of lower production costs.

The focus of future growth in the sector continues to be Central and Eastern Europe and Turkey.

The European market is tough already, forcing converters and their suppliers to adapt, but it seems inevitable that relentless pressures to reduce costs will force even greater changes to its landscape in the future.

Paul Gaster is senior consultant with PCI Films Consulting Ltd., a UK-based market intelligence firm specializing in the flexible packaging industry. This article refers to “The European Flexible Packaging Market 2005,” the latest edition in PCI’s series of annual studies on the European flexible packaging market. It updates historical data and provides market analysis and statistics for 2004 and forecasts to 2009. The 250-page study is based on original field research conducted across Europe in early 2005. For further information contact This email address is being protected from spambots. You need JavaScript enabled to view it. or visit pcifilms.com.